Hanlong Case Shows Flaws in Investor Protections

Events surrounding the Hanlong Mining insider trading case point to three shortcomings in the way our companies and regulators behave. The way the allegations became public itself imposed losses on investors.

On Tuesday morning, the share price of Sundance Resources fell as much as 20% before trading was stopped after about half an hour. By the end of the week, after the Sundance chairman had made a statement to the market about the status of its negotiations with Hanlong Mining, the price of Sundance shares showed no net change from a week earlier.

Hanlong Mining holds 19% of the shares in Sundance and on 15 July had advised Sundance that it intended to bid for 100% of the company.

Prompting the market sell off on Tuesday morning was a media statement from corporate cop ASIC advising that it had sought and obtained court orders against certain executives of Hanlong Mining in connection with its investigation into suspected insider trading.

These events reinforce perceptions that the market for Australian mining stocks is not for the fainthearted. They also suggest that investors who faced large losses on Tuesday morning could be better protected.

Firstly, Australia's takeover laws allow pretend bids. By Tuesday, investors had not heard from Hanlong or Sundance about the foreshadowed takeover for eight weeks. What is the status of the bid? Will it happen? Who knows! No formal documents have been filed. The market has been trading in an information vacuum.

Companies can use the announcement of a bid to get commercial negotiations underway or to frighten off other suitors. It can put a ceiling on the price but retain an option to go lower. There is apparently no reason to give investors any further information or to commit to any timeline.

Up to 14 or perhaps 21 days might be reasonable timeframes within which to finalize confirming documentation or withdraw but permitting eight weeks of silence is simply allowing bidding companies to pursue their own interests at the expense of ordinary investors needing to take decisions about their portfolios.

The second source of investor losses comes from the tendency of Australian companies to seemingly lose track of time. On 18 July, Sundance said it would "advise the market of any material developments".

No doubt, Sundance is taking great care to obtain appropriate legal advice and is acting within its legal responsibilities. From an investor perspective, however, the absence of any material developments for over eight weeks could itself to be construed as a material development. At the very minimum, it leaves an information vacuum which risks increasing doubt about progress toward the foreshadowed end.

At some point, the passage of time must become material. If not eight weeks, how many weeks should be allowed to elapse without any material development before information should be provided about the status of negotiations?

Prompted by the ASIC announcement, Sundance told investors on Tuesday that there was no change to its previously stated strategy and that it "continues to progress its advanced negotiations".

This statement must mean all the companies with which Sundance has engaged are still negotiating and, in each and every instance, those negotiations are closer to a transaction than they were three weeks or six weeks ago.

Behind the curtain, there are whispers that other Chinese parties had begun to drag their feet after the Hanlong bid landed on the table. We are compelled by the Sundance announcement to disregard this possibility. Otherwise, it would be misleading.

The widespread tendency of mining companies to let the content of their previous statements slip by without referring to them again, usually to avoid admitting publicly to slippages in development timelines, invites mistrust of any company engaging in prolonged bouts of silence.

The third source of investor losses came from the way ASIC itself failed to contribute to continuous disclosure when it had the opportunity to do so. According to the ASIC statement released on Tuesday, it had obtained court orders relating to its insider trading allegations the day before. Yet, trading in Sundance shares was allowed to begin on Tuesday morning without any notice to the market. Forty seven million shares changed hands on Tuesday before a halt was called about 30 minutes into the trading day.

Perhaps ASIC did not anticipate the market reaction to its announcement (which would be a significant worry given its market oversight responsibilities). In any case, there would be merit in having some protocol in place, not only within ASIC but within all regulators of listed companies, requiring that announcements having the potential to affect share prices should be lodged with the stock market.

Whatever the merits of the insider trading allegations, there is little doubt that some investors were financially disadvantaged by the circumstances in which the allegations were revealed. It might be interesting to see, after the evidence is presented, whether these losses are as great as the losses identified from any proven insider trading activities themselves. Perhaps someone can do that analysis after all the dust has cleared in a year or two.

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